Why you wait for rate decreases and why you don’t get it all

Jane Slack-Smith

finance-advice

1 minute read

Why you wait for rate decreases and why you don’t get it all

by Jane Slack-Smith

December 05, 2012

So, the Reserve Bank of Australia has reduced the interest rate in December to 3% - the lowest since the global financial crisis of 2009. However, the banks have not always passed on all the rate cuts to their clients and often not in a timely manner.

Blogger: Jane Slack-Smith, Investors Choice Mortgages

The lenders have costs, costs of funds is essentially the gap between what the RBA interest rate is and what the bank passes onto us. When money is tight world-wide then the cost of money goes up (a lot like supply and demand that drives the housing market). Hence the lenders don’t feel they can always pass on the full interest rate cut – in this case the full 0.25%.

However they are a bit sneaky they often can take a week or more to decide how much they will pass on, even if they announce they will relatively quickly – in truth they are stalling. The RBA always meets the first Tuesday of each month (except January) and they announce the rate at 2.30pm on that day.

So the rate could stay the same, go up or go down. Really the lenders could plan ahead and model their cost based on those three scenarios so they could respond quickly. And I bet they do. However the delay in passing on any rate reduction keeps money in their pockets. Funnily enough they seem to pass on the full interest rate hike immediately.

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The cost of funds effects many things. For instance your credit card and personal loan interest rates. Australians have a lot of personal debt, however we don’t concentrate on these other areas so much when the interest rates are moved. It may not surprise you that these rates don’t change much at all when the RBA makes their announcement – in theory they should – check your next credit card statement and see if you get any interest rate reduction.

One area many get caught out is the rate they are paid by the bank on their term deposits. Often those with a significant amount of money to invest will often look to park it for some time in a term deposit. This might be you, you may have researched and negotiated and got a great deal on your term deposit. Guess what a year later or whenever that term expires you will probably get a notice in the mail asking you to renew your term – often with a simple tick your money is rolled to the next term.

Here is the thing with the cost of money and the amount of money available overseas being tight the lenders need your term deposit so they can in turn lend it to someone else (at a higher rate). So when you are originally looking for that special lender with that special rate you may find some good deals – guess what when that letter comes in the mail asking you to roll-over you should do the same exercise again as they will often not be even offering you the best rate that they offer someone who comes in off the street. Yes you their customer could get a worse deal then someone they don’t know.

There is a funny story about a couple of guys talking on a train one guy says to the other “I am so glad I don’t bank with the RBA – they are changing rates all the time!” Essentially all banking is linked to the RBA. You just need to know how they work.